Author: John Phillips
I’ve been speaking with small business owners recently who all want to improve their businesses. While all these businesses offer their own unique challenges, a common theme is a lack of understanding of their numbers. The key numbers I’m talking about are:
This is basically the sum of all your expenses including the money you take home. If you don’t generate at least this amount of income, you are making a loss.
This is the total income you generated.
The amount of money you made/lost, calculated as Turnover-Expenses.
How many leads have been generated, and how many converted into customers
How many enquiries you generated from your promotional efforts, and how many of these you converted into paying customers.
Lifetime value of each customer
How much each customer will spend with you over the entire time they stay with you.
Cost of acquiring each customer
The cost of buying each customer calculated as the cost of your promotional activities divided by the number of customers that resulted from them.
The percentage of your income that is profit.
Calculating these numbers isn’t a difficult task, and determining them will reveal areas where your business is doing well, and areas where you could improve. I recently completed this exercise with a business owner who had been operating for about five months. We found the cost of acquiring a customer was a bit over $8, but each customer only had a lifetime value of 50 cents. Obviously this isn’t sustainable, and it told us that we needed to look at ways to buy customers at a significantly lower price.
Before you make any changes in your business, such as starting a marketing campaign, calculate your current numbers. This gives you a baseline against which to measure the impact of the change. Understanding your numbers really is the key to maximum profit.